Mineração Rio do Norte S.A. · A Mineração Rio de Norte S.A. (the “Company”) is a Brazilian...

Mineração Rio do Norte S.A. Financial Statements together with the Independent Auditor’s Report December 31, 2011 and 2010

Contents

Page Independent auditor's report 2 Financial statements 4 Notes to the financial statements for the years ended December 31, 2011 and 2010 (amounts expressed in thousands of US Dollars) 9

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Independent auditor’s report

To the Board of Directors and Shareholders of Mineração Rio do Norte S.A. Porto Trombetas:

1. We have audited the accompanying balance sheet of Mineração Rio do Norte S.A. (the “Company”) as of December 31, 2011, and the related statements of income, changes in shareholders’ equity and cash flows for year then ended (all expressed in U.S. Dollars). These financial statements are under the responsibility of the Company’s Management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of the Company as of December 31, 2010 were audited by other auditors whose report dated February 4, 2011, expressed an unqualified opinion on those financial statements and included and explanatory paragraph informing on its restriction of use.

2. We conducted our audits in accordance with the auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

3. In our opinion, the financial statements referred to above, fairly present, in all material respects, the financial position of Mineração Rio do Norte S.A. as of December 31, 2011, and the result of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

4. The accompanying financial statements were prepared for the information and use by the Company’s Board of Directors and for the purpose of inclusion in the financial statements of the Company’s investors under the equity method of accounting and are not intended to be and should not be used by anyone other than these specified parties.

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5. A significant portion of the Company’s activities is concentrated in operations with its parent and affiliated companies (see Note 17).

São Paulo, February 2, 2012.

Grant Thornton Laércio Ros Soto Junior Auditores Independentes Partner - Assurance

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Notes 2011 2010

Current assets Cash and cash equivalents 4 43,318 26,497

Accounts receivable -

Related parties 17 44,608 55,844

Third parties - - 1,361

Inventory 5 22,063 20,338

Taxes recoverable 9 2,693 1,427

Escrow deposits 6 4,064 380,419

Other - 3,786 3,189

Total current assets 120,532 489,075

Noncurrent assetsFixed assets, net 7 530,161 524,246

Intangible assets, net 8 1,597 2,263

Other noncurrent assets Escrow deposits 6 82,978 273

Taxes recoverable 9 10,975 12,709

Deferred income taxes 14 41,758 19,654

Investments - 219 247

Other - 1,453 -

Total noncurrent assets 669,140 559,392

Total assets 789,672 1,048,467

Mineração Rio do Norte S.A.

Balance sheets as of December 31, 2011 and 2010

(In thousands of US Dollars)

ASSETS

The accompanying notes are an integral part of these financial statements.

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Current liabilities Trade accounts payable - 29,456 27,796

Short-term debt 10 98,826 253,974

Payroll - 12,967 12,798

Dividends Payable 15 18,496 -

Income tax and other taxes 11 6,011 6,877

Income taxes - 559 8,056

Provision for reforestation and mine closure 13 1,700 1,914

Other - 1,042 4,633

Total current liabilities 169,057 316,048

Noncurrent liabilities Long-term debt 10 148,563 100,651

Deferred income taxes 14 31,141 6,960

Income tax and other taxes 11 - 302

Provision for contingencies 12 105,079 240,107

Provision for reforestation and mine closure 13 36,088 40,492

Other - 365 326

Total noncurrent liabilities 321,236 388,838

Shareholders' equity Preferred, no-par-value class A shares -

400 billion shares authorized, issued and outstanding - 54,622 54,622

Common, no-par-value shares - 200 billion

shares authorized, issued and outstanding - 27,310 27,310

Retained earnings (losses) -

Appropriated - 50,718 61,312

Not appropriated - (48,238) (59,816)

Accumulated other comprehensive income - 214,967 260,153

299,379 343,581

Total liabilities and shareholders' equity 789,672 1,048,467

Mineração Rio do Norte S.A

Balance sheets as of December 31, 2011 and 2010



LIABILITIES AND SHAREHOLDERS' EQUITY

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Notes 2011 2010 2009

Operating revenues, net of discounts and returns

Bauxite sales - related parties 16 492,894 404,499 445,194

Bauxite sales - customers - 994 13,775 8,817

493,888 418,274 454,011

Taxes on revenues (57,373) (45,798) (57,346)

Net operating revenues 436,515 372,476 396,665

Operating costs and expenses

Cost of bauxite sold - (361,770) (316,425) (251,505)

General and administrative expenses 18 (11,553) (11,587) (10,973)

Other 19 (3,235) 18,020 3,595

(376,558) (309,992) (258,883)

Income from operations 59,957 62,484 137,782

Nonoperating income (expenses)

Financial income 20 19,355 17,611 17,301

Financial expenses 20 (20,971) (21,296) (20,644)

Tax litigation - interest - Law no. 11.941/09 20 (12,832) (43,564) (96,339)

Foreign exchange rate 20 (15,125) 5,719 37,813

(29,574) (41,530) (61,869)

Income before income taxes 30,384 20,954 75,913

Income taxes

Current 14 (19,390) (17,383) (55,151)

Tax litigation - principal - Law no. 11.941/09 - - - (68,498)

Deferred 14 8,485 (6,581) 56,418

Net income 19,479 (3,010) 8,682

Fair market value of derivatives - (745) 241 307

Foreign currency translation adjustment gains (losses) - (44,441) 15,591 102,824

Total comprehensive income (25,707) 12,822 111,813

Mineração Rio do Norte S.A.Income statements

for the years ended December 31, 2011, 2010 and 2009



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2011 2010 2009

Class a preferred shares 54,622 54,622 54,622

Common shares 27,310 27,310 27,310

81,932 81,932 81,932

Appropriated retained earningsLegal reserve

Balance as of January 1 61,312 58,671 42,853

Transfer from (to) unappropriated retained earnings (10,594) 2,641 15,818

Balance as of December 31 50,718 61,312 58,671

Income tax exemption reserve-

Balance as of January 1 - - 2,196

Transfer from (to) unappropriated retained earnings - - (2,196)

Balance as of December 31 - - -

Total appropriated retained earnings 50,718 61,312 58,671

Unappropriated retained earningsBalance as of January 1 (59,816) (50,846) 46,474

Net income 19,479 (3,010) 8,682

Dividends approved (18,496) (3,319) (70,434)

Minimum mandatory dividends - - (21,946)

Transfer from (to) reserves 10,594 (2,641) (13,622)

Balance as of December 31 (48,238) (59,816) (50,846)

Accumulated other comprehensive incomeBalance as of January 1 260,153 244,321 141,190

Fair market value of derivatives (745) 241 307

Foreign currency translation adjustment gains (losses) (44,441) 15,591 102,824

Balance as of December 31 214,967 260,153 244,321

Total shareholders' equity 299,379 343,581 334,078

Mineração Rio do Norte S.A.Statements of changes in equity

for the years ended december 31, 2011, 2010 and 2009



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2011 2010 2009Cash flow from operating activitiesNet income 19,479 (3,010) 8,682

Adjustments to reconcile P&L to net cash provided

by operating activities

Depreciation and depletion 65,245 60,211 53,757

Provision for contingencies 92,271 (15,121) (1,609)

Tax litigation - Law No. 11.941/09 12,832 43,564 164,837

Deferred income taxes (8,485) 6,581 (56,418)

Net book value of fixed assets retired 32 437 955

Escrow deposits - accrued interest (17,099) (16,726) (15,684)

Provision interest for reforestation and mine closure 3,383 2,960 2,268

Provision for contingencies - accrued interest - -

Accrued interest and translation adjustments 656 (6,575) (44,238)

Other - (160) (413)

Decrease (increase) in operating assets

Accounts receivable 6,949 (2,315) 39,451

Inventory (4,476) 3,019 820

Escrow deposits 73,104 (43) -

Taxes recoverable (1,245) 6,002 1,324

Other (2,693) 915 (600)

Increase (decrease) in operating liabilities

Trade accounts payable 5,337 3,148 944

Payroll and related parties 1,790 325 772

Income tax and other taxes (7,796) (10,752) (11,936)

Provision for reforestation and mine closure (3,168) (2,968) (2,299)

Other (3,358) 1,084 2,649

Net cash provided by operating activities 232,758 70,576 143,262

Cash flow from investing activitiesAdditions tofixed assets (140,619) (68,133) (51,882)

Net cash used in investing activities (140,619) (68,133) (51,882)

Cash flow from financing activitiesBorrowings 263,549 277,501 121,408

Repayment of loans (339,567) (230,706) (114,669)

Dividends paid - (26,146) (105,795)

Net cash used in financing activities (76,018) 20,649 (99,056)

Effect of translation adjustments on cash and cash equivalents 25,584 1,861 1,376

Increase (decrease) in cash and cash equivalents 41,705 24,953 (6,300)

Cash and cash equivalents, beginning of year 1,613 1,544 7,844

Cash and cash equivalents, end of year 43,318 26,497 1,544

Supplementary disclosures of cash flow information:Cash paid during the year for

Interest 18,961 19,089 18,527

Income taxes 15,227 27,570 62,075

Noncash financing activity

Proposed dividends - - 21,946

Mineração Rio do Norte S.A.Cash flow statements

for the years ended december 31, 2011, 2010 and 2009



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Notes to the financial statements for the year ended December 31, 2011 (In thousands of US Dollars)

1. Business A Mineração Rio de Norte S.A. (the “Company”) is a Brazilian corporation owned by Vale S.A., Alcan Alumina Ltda, BHP Billiton Metais S.A., Companhia Brasileira de Alumínio, Alcoa Alumínio S.A., Norsk Hydro Brasil Ltda, Alcoa World Alumina LLC and Alcoa World Alumina Brasil Ltda (see Note 15). The Company is engaged in extracting, processing and selling bauxite ore.

The Company sells almost all of its production to its shareholders and their related parties. Such sales are primarily governed by long-term contracts that establish annual quantities and similar sales terms for each shareholder. The quantities are confirmed annually and may vary slightly. Sale prices are calculated based on a price formula stipulated in the sales contracts. Accounts receivable from sales of bauxite ore are due in 30 days in average. Pursuant to the contracts, the price is based on a fixed amount calculated in a way as to preserve the Company’s internal cash flow balance and two variables dependent upon the market price of alumina and aluminum. If for any reason the buyer is unable to take the annual minimum quantity stipulated in the contract, the Company will be entitled to offer the product to a third party for a floor price defined by the buyer, provided the price is not lower than 90% of the price set by contract. In this case, the buyer will reimburse the Company for the difference. Any unlifted tonnage which the Company is unwilling or unable to dispose of as aforesaid shall not be produced and shareholder shall pay the Company in respect of such unlifted tonnage a price equal to the sum of the base price and escalation adjustement prevailing at that time and, should there be any net savings resulting from not producing such unlifted tonnage, the Company shall pay to shareholder a rebate in an amount established by the Company at is sole discretion as corresponding to such net savings. As of December 31, 2011 sales to related parties represented approximately 99.8% (96.7% in 2010).

As of December 31, 2011 the Company presents a negative working capital of US$ 48,525 mainly result from the financing obtained to provide the funds needed to open new mines. A Management based on the Company’s business plan is convinced that the commercial operations that will be performed in the next years will be sufficient to fulfill its short-term obligations. Moreover, Management believes the Company’s ability to provide cash allows it to renew short-term loans or change them to long-term credit lines.

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The Company manages its relations with the environment as a strategic factor, under the assumption of fully complying with the applicable legislation and internal guidelines and standards. It adopts a rigorous environmental management program as a means of minimizing the impacts caused by its mining operations, in conformity with ISO 14001, a certification that the Company was granted for both its industrial operations and the urban center of Porto Trombetas. The Company permanently monitors, performs revegetation, and develops seedlings and educational activities directed to its employees and to the community.

2. Basis of presentation The Company maintains its accounting records and prepares its primary financial statements in accordance with Brazilian accounting practices.

The Company’s functional currency that better reflects its operations is the Brazilian real. The following criteria for the translation of Brazilian Reais into U.S. Dollars have been applied to the Brazilian functional Reais basis financial statements:

The United States dollar amounts (US$) result from the translation of the financial statements at the rates indicated below and are shown for equity method purposes of certain Company’s investors. The translation was performed in accordance with the provisions of Statement of Financial Accounting Standards No. 52 (“SFAS 52”) “Foreign Currency Translation” for non-hyperinflationary economies beginning December 1, 1997.

The official selling rates of exchange to the United States Dollar were: R$ 2011 2010 At December 31 1.8758 1.6662 Average for the year 1,6750 1,7601

The Company maintains its accounting records in Brazilian currency and in the Portuguese language. The U.S. Dollar amounts for the years presented have been remeasured from the Brazilian currency amounts in accordance with the criteria set forth in Statement of Financial Accounting Standards No. 52 (SFAS 52). Since the beginning management had elected the US dollar as the Company’s functional currency. However, during 2008, the Company’s management changed the functional currency from the Brazilian real to the U.S. dollar. This change was effected in accordance with Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation and was made taking in consideration the functional currency that better reflected the Company’s operations, such as sales price and operating costs, the Company made the restatement the 2 years preceding.

The amounts have been translated into U.S. dollars, for equity and consolidation purposes into the Company’s Shareholder’ financial statements. The translation was performed in accordance with the standards set forth in SFAS 52, as follows:

• monetary assets and liabilities (i.e. cash, accounts receivable, accounts payable, etc.) were translated at the year-end exchange rate;

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• nonmonetary assets and liabilities (i.e. inventories, fixed assets, deferred charges, etc.) that, until 2005 were remeasured into U.S. dollars at the historical rate were translated into Brazilian reais as of January 1st 2006, at the exchange rate in effect, and from this period on, were added to/deducted from these balances in reais, and then translated into U.S. dollars at the exchange rate in effect at December 31, 2011 and 2010;

• shareholders’ equity balances (i.e. capital, additional paid-in capital, retained earnings, etc.) that were previously translated into U.S. dollars at the historical rate, were translated into Brazilian reais, as of January 1st, 2006 at the exchange rate in; all transactions, beginning from this on and thereafter, were recorded in Brazilian reais and translated into U.S. dollars using the exchange rate prevailing on the date of each transaction. Any exchange differences are recorded in a separate component of shareholders’ equity (accumulative other comprehensive income (loss));

• income statement accounts continue to be translated from Brazilian Reais (R$) into U.S. Dollars (US$) using the monthly average exchange rates;

• revenues, expenses, gains and losses and cash flows were translated using the average monthly exchange rate prevailing during each year; and

• gains and losses arising from transactions denominated in currencies other than the Real are included in the income for the year

• the net effect of the exchange rate change on the net assets is recorded as foreign currency translation adjustment and is included in accumulated other comprehensive loss, a separate component of shareholders’ equity. Previously, the balance of the nonmonetary accounts were remeasured using historical U.S. dollars and gains and losses resulting from remeasurement of the monetary assets and liabilities were credited/charged to operations.

3. Summary of significant accounting policies Significant accounting policies used in the preparation of the financial statements are described in the following paragraphs

3.1. Cash and cash equivalents

Cash and cash equivalents consist primarily of cash on hand, cash in bank accounts, and highly liquid financial investments with original maturities of three months or less when purchased. The carrying amounts of the Company’s cash equivalents approximate their fair value.

3.2. Accounts receivable

Accounts receivable are stated at estimated realizable values. An allowance for doubtful accounts is provided in an amount considered by management to be sufficient to cover future probable losses related to unsettled amounts.

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3.3. Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s financial statements include various estimates concerning the selection of useful lives of property, plant and equipment, accruals for contingencies, accrual for reforestation and closure of mines, and other similar evaluations. As additional information becomes available, or actual amounts are determinable, the recorded estimates are revised. Although these estimates are based on management’s best available knowledge of current and expected future events, actual results could be different from those estimates.

3.4. Impairment of long-lived assets

For long-lived assets, including property, plant and equipment, intangible assets, the Company evaluates the carrying value of the assets by comparing the estimated future cash flows generated from the use of the assets and their eventual disposition with the assets’ reported net book values. The carrying values of assets are evaluated for impairment when events or changes in circumstances occur, which may indicate the carrying amount of the assets may not be recoverable. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed discounted future cash flows expected to be generated by such assets. Assets to be disposed of are reported at the lower of their carrying amount or fair market value less costs to sell. No impairment has been recorded in the accompanying financial statements for the years ended December 31, 2011 and 2010.

3.5. Inventories

Inventories are stated at the lower of average cost of acquisition or production, as compared to replacement cost or net realizable value. Cost is determined principally on the average cost method. Provision for obsolete or slow-moving inventory is made based on management's analysis of inventory levels and future sales forecasts.

3.6. Transactions in foreign currencies

The Company records transactions in foreign currencies (other than Brazilian reais, the Company’s functional currency) using rates of exchange prevailing at the time of recording each transaction. Assets and liabilities denominated in foreign currencies are adjusted to reflect the year-end rate of exchange. The net gain/loss arising from receipt/payment or adjustment of foreign currency assets and liabilities is included in the accompanying statements of earnings.

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3.7. Property, plant and equipment, at cost

Property, plant and equipment are stated at cost of acquisition or construction, including qualifying interest cost incurred during the construction period of major new facilities, less accumulated depreciation. Depreciation is calculated under the straight-line method at annual rates based on the estimated useful lives of the assets mentioned at Note 7. The original costs of exploration and development of mineral reserves were capitalized. Depletion is calculated as a percentage of bauxite ore produced in proportion to estimated total reserves. Additional development costs to produce existing reserves are charged to production costs as incurred.

3.8. Intangible

Represent original cost of acquisition of software less accumulated amortization.

3.9. Accrual for reflorestation

The Company calculates its accrual for reforestation and closure of mines in accordance with ASC Topic 410, “Asset Retirement and Environmental Obligations”. Expenses associated with environmental remediation and closure of mines are recorded taking into consideration the following:

• expenses related to compliance with environmental regulations are capitalized in property, plant and equipment when incurred with a corresponding entry to accrual for reforestation and closure of mines;

• depreciation is based on the estimated period of production of ore; • cost estimates are recorded considering the present value of liabilities, discounted at a

long-term risk-free rate; • cost estimates are revised yearly, with the consequent revision of the calculation at

present value, adjusting assets and liabilities already recorded with a corresponding entry to operations.

3.10. Income taxes

The provision for income taxes is calculated and recorded based on the taxable income for each year, adjusted in accordance with the tax legislation in effect. Income tax is calculated at the rate of 15% plus an additional 10% on taxable income that exceeds R$ 240 thousands. Social contribution is calculated based on taxable income at the rate of 9%.

The Company accounts for income taxes under the provisions of ASC Topic 740 (SFAS No. 109), “Accounting for Income Taxes”, which requires the application of the comprehensive liability method of accounting for income taxes. SFAS No. 109 requires recognition of deferred tax assets and liabilities for the estimated future tax consequences of events attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards.

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Deferred income taxes are provided based on the estimated future tax effects of temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Deferred tax assets are reduced through the recognition of a valuation allowance, as appropriate, if, based on the weight of available evidence, it is more likely than not that the deferred tax asset will not be realized.

3.11. Provisions for tax, civil and labor risks

Conditions may exist as of the date the financial statements, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be reasonably estimated, then the estimated liability is accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed The company is party to a few lawsuits and administrative proceedings, as described in Note 12. Provisions are established for all of the risks referring to lawsuits that represent probable losses and estimated with a certain degree of reliability. The rating of the probability of loss includes assessing the evidence available, judicial hierarchy, judicial decisions available, most recent court decisions and their relevance in the legal system, as well as the rating issued by external legal advisors. Management believes such provisions for tax, civil and labor risks are correctly presented in the financial statements.

3.12. Finance lease

The finance lease agreements are classified as such because the terms and condition of the lease agreement substantially transfer the risks and rewards of ownership of the asset to the leaseholder.

Finance leases are capitalized in the balance sheet at the beginning of the lease at the lower amount between the fair value of the asset leased and the present value of the minimum payments of the lease.

Each finance lease installment paid is partially allocated to liabilities and partially allocated to financial charges. The corresponding liabilities, net of financial charges, are classified in current and noncurrent assets according to the term of the agreement. Fixed assets acquired by means of finance leases are depreciated over the useful lives of the assets.

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3.13. Other current and noncurrent assets and liabilities

Assets are recognized in the balance sheet when it is likely that their future economic benefits shall inure to the Company and their cost of amount can be reliably measured.

Liabilities are recognized in the balance sheet when the Company has a legal or constructive obligation as the result of a past event and it is likely that economic resources will be required to settle it. The Company accrues for liabilities for future compensation to employees for vacations vested during the year.

They are increased, where applicable, of the corresponding charges and inflation or translation adjustments incurred. Provisions are recorded on the basis of the best estimates of the risk involved.

3.14. Revenues recognition

Revenues from product sales are recognized when the related goods are shipped to the customer and the transfer of risks, rights and obligations associated with the ownership of products take place.

3.15. Comprehensive income (loss)

The Company reports comprehensive income (loss) in accordance with ASC Topic 220 (SFAS No. 130) in the statements of income (loss), while accumulative other comprehensive loss is included in the statements of shareholders’ equity of the balance sheet. Comprehensive income consists of foreign currency translation adjustments.

3.16. Financial instruments and derivatives

The carrying amount of the Company's financial instruments, which include cash equivalents, accounts receivables, accounts payable and current and long-term notes payable to banks, approximates their fair value at December 31, 2011 and 2010. Derivatives - the Company entered into a derivative transaction (“Swap”) in order to hedge its exposure to the interest rate (“LIBOR”). The Company does not enter into derivative transactions for trading purposes. Under ASC Topic 815 “Derivatives and Hedging”, the Company recognizes all derivatives as either assets or liabilities in the balance sheet and measures those instruments at fair value. Changes in fair value are recognized in earnings unless specific hedge criteria are met. ASC Topic 815 enables companies to designate qualifying derivatives as hedging instruments based on the exposure being hedged. These hedge designations include fair value hedges and cash flow hedges. Changes in the fair value of a derivative that is highly effective as, and is designated and qualifies as, a fair value hedge are recognized in earnings as offsets to the changes in fair value of the exposure being hedged. Changes in the fair value of a derivative that is highly effective as, and is designated as and qualifies as, a cash flow hedge are deferred in accumulated other comprehensive income and are recognized into earnings as the hedged transactions occur. Any ineffectiveness is recognized in earnings immediately. For the hedge contract, the Company provides formal documentation of the hedge and effectiveness testing in accordance with ASC Topic 815 and classified the open contracts as cash flow hedges.

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3.17. Employee benefit plans

The Company has a defined contribution plan covering all of its employees who meet age and services requirements.

3.18. Earnings per share

Earnings per share are computed by dividing net income by the weighted average number of common and preferred shares (which are substantially common stock equivalents for earnings distribution purposes) outstanding during the periods.

Recently issued accounting pronouncements The FASB recently issued a number of Statements of Financial Accounting Standards and interpretations; the standards and interpretations described below have not had or are not expected to have a material impact on the financial position and results of operations of the Company:

• Update No. 2011-09 - Compensation - Retirement Benefits - Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer’s Participation in a Multiemployer Plan;

• Update No. 2011-08 - Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment;

• Update No. 2011-07 - Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities (a consensus of the FASB Emerging Issues Task Force);

• Update No. 2011-06 - Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers (a consensus of the FASB Emerging Issues Task Force);

• Update No. 2011-05 - Comprehensive Income (Topic 220): Presentation of Comprehensive Income;

• Update No. 2011-04 - Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs;

• Update No. 2011-03 - Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements;

• Update No. 2011-02 - Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring;

• Update No. 2011-01 - Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20.

Conclusion The Company is doing analyses to verify if these pronouncements have some impact on the Company’s financial statements as of December 31, 2011. In the first analysis the Company believes that these pronouncements do not have significant impacts on the financial statements.

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4. Cash and cash equivalents The balance of cash and cash equivalents includes cash and banks in addition to investments that are redeemable at any time without loss of the income earned, performed at top-tier financial institutions, as follows:

12/31/11 12/31/10 Cash 12 1,973 Time deposits (i) 43,306 24,524 Total 43,318 26,497 (i) Time deposits consist of Deposit Certificates at blue chip financial institutions in Brasil as follows:

Financial Institutions 12/31/11 12/31/10 Banco do Brasil 3,737 - Bradesco 10,701 8,406 Itaú 10,659 - Votorantim 4,953 4,410 Westlb 13,256 11,708 Total 43,306 24,524

The yield of the investments are equivalent to 100% of the Interbank Deposit Certificate (“CDI”) rate, with maturity terms shorter than three months, and such certificates are immediately convertible to a known amount of cash, being subject to an insignificant risk of having their value changed.

5. Inventory As of December 31, 2011 and 2010 the inventory comprised:

12/31/11 12/31/10 Bauxite: Mined 421 555 Crushed 479 941 Washed 3,308 2,605 Wet domestic 2,536 3,615 Dried 542 1,248 7,286 8,964 Supplies 19,316 17,211 Provision for obsolescence (i) (4,539) (5,837) Total 22,063 20,338

(i) The table below shows the movement of the provisions for the obsolescence of materials:

US$ Balance as of 12/31/2010 5,837 Additions 229 Reversals and decreases (963) Translation adjustments (564) Balance as of 12/31/2010 4,539

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6. Escrow deposits As of December 31, 2011 and 2010 escrow deposits were composed of:

12/31/11 12/31/10 Federal taxes on capital shares reduction transaction 86,868 380,419 Other 174 273 Total 87,042 380,692 Current 4,064 380,419 Noncurrent 82,978 273 The movement for the year is as follows:

2010 2011

Addition Reversal Interest Foreign exchange Total

Federal taxes on capital shares reduction transaction (i) 380,419 - (298,224) 17,085 (12.412) 86,868 Other 273 54 (144) 14 (23) 174 Total 380,692 54 (298,368) 17,099 (12,435) 87,042

(i) Federal taxes on capital shares reduction transaction.

On April 16, 2003, the Company was assessed by the Federal Internal Revenue Service for taxes associated with a capital shares reduction that occurred on July 22, 1999. As required by Tax Authorities, in May 2003 the Company made a legal deposit in the amount of US$ 347,390 (includes financial interest), in order to challenge this claim in court.

On May 27, 2009, Law No. 11941/09 was issued, establishing benefits for debt payment and rescheduling at the National Treasury Attorney General Office and the Brazilian Federal Revenue Service.

On November 30, 2009, the Company elected to withdraw the lawsuit and filed with the Federal Revenue Agency at Santarém, State of Pará (“PA”) its registration in the program, recognizing in its books the allowance for settlement of the lawsuit (the appeals are supported by escrow deposits).

On December 30, 2010, due to new understandings by the Brazilian Federal Revenue Service concerning the amount that is due, the Company completed the write-off of court deposit by US$ 43,564.

On the 18th of July of 2011, His Honor Judge of the 22nd Federal Court decided to issue the withdrawal of deposit permit on behalf of MRN in the amount of US$ 165,744of which U$ 132,480was converted into income to the Federal Government, remaining in the “Judicial deposit” account the amount of US$ 86,868 adjusted for inflation until December 31, 2011. The release of such amount depends on the trial to take place of the appeal filed by the company regarding the correct application of the benefits of Law No. 11.941/09.

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7. Fixed assets

Industrial and other installations

Buildings and facilities

Machinery and equipment Railroads

Mine closure Mines

Furniture and fixtures

Vehicles and ferries

Construction in progress Total

Depreciation rate 5% a 10% 4% 10% 4% a 10% 3% at 33% 11% at 50% 10% a 20% 10% a 25% - - Balance as of 12/31/2010 Cost 541,387 122,903 272,670 70,709 24,319 62,114 18,912 124,969 87,984 1,325,967 Depreciation/ depletion (317,657) (89,363) (212,302) (62,683) (4,605) (11,740) (13,050) (90,321) - (801,721) Net 223,730 33,540 60,368 8,026 19,714 50,374 5,862 34,648 87,984 524,246 Balance as of 12/31/2011 Cost 535,734 147,952 240,332 60,560 20,919 56,607 17,096 138,391 84,751 1,302,342 Depreciation (314,354) (89,244) (198,582) (54,723) (4,625) (10,712) (12,342) (87,599) - (772,181) Net 221,380 58,708 41,750 5,837 16,294 45,895 4,754 50,792 84,751 530,161 Cost



Machinery and equipment

Railroads Mine closure

Mines Furniture and fixtures



Balance as of 12/31/2010 541,387 122,903 272,670 70,709 24,319 62,114 18,912 124,969 87,984 1,325,967 Cost 47,194 36,991 7,038 18 - 5,542 1,414 30,944 6,901 136,042 Depreciation / Depletion - (180) - - (106) (207) - (493) Foreign exchange (52,847) (11,942) (39,196) (10,167) (3,400) (11,049) (3,124) (17,315) (10,134) (159,174) Balance as of 12/31/2011 535,734 147,952 240,332 60,560 20,919 56,607 17,096 138,391 84,751 1,302,342

Depreciation



Machinery and equipment

Railroads Mine closure Mines Furniture and fixtures



Balance as of 12/31/2010 317,657 89,363 212,302 62,683 4,605 11,740 13,050 90,321 - 801,721 Cost 21,031 3,160 20,024 2,027 1,192 2,513 1,403 13,300 - 64,650 Depreciation - - (151) - - (499) (104) (206) (960) Foreign exchange (24,334) (3,279) (33,593) (9,987) (1,172) (3,042) (2,007) (15,816) (93,230) Balance as of 12/31/2011 314,354 89,244 198,582 54,723 4,625 10,712 12,342 87,599 - 772,181 The balance of construction in progress refers to construction work and equipment relating to the Company’s operations under final construction or assembly phase. 67% are investments in new mines.

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a) Construction in progress is represented by the major projects:

Projects 2011 Mine Opening – Monte Branco 41,369 Mine Opening at the Bela Cruz Plateau 11,808 Construction of the Reservoir of Mining Waste 7,473 Changes in Screening and Refrigeration 2,370 Geological Research of the Plateau 2,245 Monte Branco’s Licensing 1,907 CTLD Substitution – Warning 1,726 Mine Drainage 1,166 Incinerator Acquisition and Installation 851 Environmental Compensation – Monte Branco 830 Construction of New Landfill 811 Environmental Licensing – Cruz Alta 754 Other projects 11,441 Total 84,751

The interest and inflation adjustments capitalized during the period the natural deposit of ore is exploited are recorded at acquisition or construction cost in the construction in progress. Capitalized in 2011 were U$ 3,372 (US$ 1,474 in 2010).

8. Intangible assets 2011 2010 Amortization

rate (%) Cost Amortization Net Cost Amortization Net Software 20 14,115 (12,518) 1,597 15,345 (13,082) 2,263 Total intangible assets - 14,115 (12,518) 1,597 15,345 (13,082) 2,263

Cost Amortization Balance as of 12/31/2010 15,345 Balance as of 12/31/2010 13,082 Cost 781 Cost 1,073 Depreciation - Depreciation - Foreign exchange (2,011) Foreign exchange (1,637) Balance as of 12/31/2011 14,115 Balance as of 12/31/2011 12,518 9. Recoverable taxes 12/31/11 12/31/10 ICMS - State Value-Added Tax 8,222 7,320 PIS - Tax on Gross Revenues for the Social Integration Program 972 1,216 COFINS - Tax on Gross Revenues for Social Security Financing 4,474 5,600 Total 13,668 14,136 Current 2,693 1,427 Noncurrent 10,975 12,709 10. Short and long-term debit 12/31/11 12/31/10 Foreign currency 172,248 154,658 Local currency 75,141 199,967 Total 247,389 354,625

12/31/11 12/31/10 Current 98,826 253,974 Noncurrent 148,563 100,651 Total debit 247,389 354,625

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The foreign currency debt of US$ 172,248 (US$154,658 for December 31, 2010) represents, basically, the financing, in US Dollars, of the Company’s expansion and advances on foreign exchange contracts for future export sales. The financing is summarized as follows:

US$ Date Financial institution 12/31/11 12/31/10 Issuance Maturity Interest Westlb 33,368 60,051 02/2008 08/2009 a 02/2013 LIBOR + Spread Bando do Brasil 37,820 52,133 06/2011 01/2012 LIBOR + Spread Bradesco 18,071 18,629 05/2011 01/2012 LIBOR + Spread Finem 22,857 23,845 03/2010 01/2017 LIBOR + Spread Westlb 60,132 - 11/2011 11/2016 LIBOR + Spread 172,248 154,658

The local currency debts are as follows:

US$ Date Financial institution 12/31/11 12/31/10 Issuance Maturity Interest Finame 9,957 5,875 08/2006 09/2015 TJLP + Spread Banco do Brasil - 75,151 04/2010 04/2011 CDI + Spread Bradesco - 75,314 04/2010 04/2011 CDI + Spread Bradesco - hedge 339 952 11/2008 02/2013 3,98% Finem 58,441 42,675 03/2010 01/2017 TJLP + Spread Itaú Leasing 6,404 - 02 a 04/2011 02 a 04/2014 CDI + Spread 75,141 199,967 Bradesco Swap This contract is for a transaction to hedge the swap of its cash flow. See Note 21.

Guarantees FINAME financing is guaranteed by the financed machinery. The exchange contracts are guaranteed by the exports’ receivables.

The guarantees provided with respect to the local currency debts consist of promissory notes and machinery and equipment. The foreign currency debts are guaranteed by promissory notes issued by the Company.

Westlb The contract of Westlb financing uses financial covenants to monitor the financial position of the Company. The covenants to be met by the contract are:

a) relation between net debt with the EBITDA (calculated on the basis of the most recently ended four fiscal quarters) shall be less than or equal to 3.0; b) the EBITDA of MRN (calculated on the basis of the most recently ended four fiscal quarters) to net interest expense for such fiscal quarter shall not be less than 5.0.

All covenants described above are calculated based on the financial statements of the Company. On December 31, 2011 the Company was in compliance with all covenants.

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The long-term portion of the Company’s debt outstanding as of December 31, 2011 falls due in the following years:

Banco Bradesco (swap) FINAME FINEM

Banco WESTLB Banco Itaú Total

2013 23 2,782 16,956 18,666 2,416 40,843 2014 - 2,069 17,647 16,000 1,024 36,740 2015 - 1,773 17,647 16,000 - 35,420 2016 - 443 17,647 16,000 - 34,090 2017 - - 1,470 - - 1,470 Total 23 7,067 71,367 66,666 3,440 148,563

Westlb II On November 30, 2011, the Company obtained a new loan from Westlb in the amount of US$ 60 million to support the long-term investments to open new mines.

11. Income tax and other taxes As of December 31, 2011 and 2010 the income tax and other taxes were composed of:

12/31/11 12/31/10 Financial Compensation for Exploiting Mineral Resources (“CFEM”) payable 2,431 2,465 Social contribution levy under dispute - 302 PIS and COFINS payable 583 2,051 ICMS payable 1,298 1,041 Other taxes 1,699 1,320 Total 6,011 7,179 Current 6,011 6,877 Noncurrent - 302 12. Provision for contingencies As of December 31, 2011 and 2010 the provision for contingencies comprised:

12/31/11 12/31/10 Federal taxes on capital shares reduction transactions 82,804 214,568 CFEM 19,948 21,476 Labor indemnity 13 72 Legal advisor fees 2,314 3,991 Total 105,079 240,107

2010 2011

Summary Addition Reversal Utilization Interest Foreign exchange Total

Civil claims 3,991 - (244) (1,326) 193 (299) 2,315 Tax claims 236,044 618 (1,141) (132,479) 13,268 (13,557) 102,752 Labor claims 72 14 (76) - 5 (2) 13 Total 240,107 632 (1,461) (133,805) 13,466 (13,858) 105,079

The Company has lawsuits and administrative proceedings at courts and government agencies, from the normal course of its operations, mainly involving tax, civil and labor claims.

The Company’s management, based on information and assessments issued by its internal and external legal advisors, has recorded a provision for contingencies at an amount considered sufficient to cover losses rated as probable.

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Provisions for contingencies formed by the Company:

Civil claims Such provisions include lawyer fees of all cases in which loss is not rated as probable.

Tax claims The Company is disputing in court the controversial part of applying tax benefits of Law No. 11.941/09 concerning its Capital Decrease proceeding and such amounts have been accrued. Details about that proceeding are described in Note 6.

There are also amounts, on account of the CFEM, that are questioned by the DNPM under the allegation that the Company unduly deducted expenses from its tax base.

Labor claims Presently, there are only two labor claims, the chances of success of which are rated as remote and its impacts are accrued in the amount of US$ 13.

Possible contingencies The contingencies as of December 31, 2011 and 2010, rated as possible losses are not recorded in the financial statements and are presented as follows:

12/31/11 12/31/10 Civil claims 2,897 2,143 Labor claims 923 2,124 Tax claims 50,665 44,082

13. Provision for reforestation and mine closure The Company’s asset retirement obligations primarily relate to the obligation to restore forest cut during the bauxite ore exploitation process. The following summarizes the activity of the asset retirement obligations for 2011 and 2010:

12/31/11 12/31/10 Beginning of the year 42,406 36,996 Translation impact (4,833) 2,129 Additions to fixed assets - 3,289 Expenses - 802 Interest incurred during the period 3,383 2,158 Interest settled during the period (3,168) (2,968) End of the year 37,788 42,406 Current 1,700 1,914 Noncurrent 36,088 40,492

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In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143 (ASC Topic 410), Accounting for Asset Retirement Obligations (“ARO”). ASC Topic 410 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and related asset retirement costs. It requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is recorded, the entity capitalizes the costs of the liability by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement.

The Company’s asset retirement obligations primarily relate to the obligation to restore forest cut during the bauxite ore exploration process. Therefore, the Company booked the accrual for reforestation costs to reflect in the balance sheet the estimate of future disbursements at present value related to the deforested area. This accrual is classified in current liabilities, amounting to US$ 1,700 (US$ 1,914 on December 31, 2010), and in the non-current liabilities, US$ 36,088 (US$ 40,492 on December 31, 2010).

In 2010, after reviewing the mine closure plan, the Company recorded in its fixed assets the amount of US$ 3,289 related to the exploration on new areas that will have to be restored. In 2011 the Company maintained the plan, for this reason no fixed assets was recorded.

14. Income taxes Income taxes in Brazil comprise the corporate income tax (“IRPJ”) and the social tax on net income (“CSLL) - which is an additional federal income tax for social security purposes. The current statutory rates are 25% for the IRPJ and 9% for the CSLL, resulting in a composite rate of 34%.

The Company is granted a reduction in federal income tax on varying levels of production arising from mining operations.

The IRPJ and the CSLL incurred in December 2011 and 2010 were calculated as follows:

2011 2010 IRPJ CSLL Total IRPJ CSLL Total Income before income taxes 30,384 30,384 - 20,954 20,954 - (%) 25 9 - 25 9 - Federal income tax benefit (charge) at statutory rate (7,596) (2,735) (5,239) (1,886) Tax reconciling items: 168 - - - - - Income tax exemption 646 - - 727 - - Tax incentives - Law No.11.941/09 (3,208) (1,155) - (12,699) (4,572) - Permanent differences 1,972 1,003 - (199) (96) - Income taxes in statements of income (8,018) (2,887) (10,905) (17,410) (6,554) (23,964) Current (14,257) (5,133) (19,390) (12,571) (4,812) (17,383) Current tax litigation- Law No. 11.941/09 - - - - - - Deferred 6,239 2,246 8,485 (4,839) (1,742) (6,581)

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The amounts of deferred IRPJ and CSLL tax liabilities, recorded in the financial statements, derive from the temporary differences on the inflation adjustments of judicial deposits (Note 6) to be paid in case the ongoing actions are successful and to the amounts referring to the provisions for contingencies added to the calculation of the above taxes.

The amounts disclosed in the balance sheets are the following:

12/31/11 12/31/10 Assets Temporary differences of contingencies and other items 122,816 57,806 Tax rate 34% 34% Total deferred income taxes 41,758 19,654 Liabilities Financial income on escrow deposits 91,592 20,472 Tax rate 34% 34% Total deferred income taxes 31,141 6,960 15. Shareholders’ equity

a) Capital stock

As of December 31, 2011 and 2010, the Company’s capital was held as follows:

Millions of shares 2011 Common (*) % Preferred (*) % VALE S.A. 80.000 40,0000 160.000 40,0000 Alcan Alumina Ltda. 25.000 12,5000 47.000 11,7500 BHP Billiton Metais S.A. 25.000 12,5000 63.800 15,9500 Companhia Brasileira de Alumínio 25.000 12,5000 35.000 8,7500 Alcoa Alumínio S.A. 16.250 8,1250 35.230 8,8075 Alcoa World Alumina LLC 10.000 5,0000 20.000 5,0000 Norsk Hydro Brasil Ltda. 10.000 5,0000 20.000 5,0000 AWA Brasil Ltda. 8.750 4,3750 18.970 4,7425 200.000 100,0000 400.000 100,0000

(*) Millions of shares.

Both common and preferred shareholders are entitled to receive an annual dividend on net income of 6% of the amount of their shares.

b) Dividends

The amount of dividends which may be remitted abroad is limited to the balance of the retained earnings account, per the Company's books in local currency. The articles of incorporation guarantee compulsory dividends to shareholders at each fiscal year of 6% of the adjusted shareholders’ equity, under article 202 of Law No. 6.404/76. The Board of Executive Officers, after establishing the compulsory Reserves, is recording the amount of U$ 18,496 as dividends payable in liabilities. No withholding tax is payable on distribution of profits earned as from January 1, 1996

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16. Revenues 12/31/11 12/31/10 Gross sales Bauxite sales - related parties (Note 16) 492,894 404,499 Bauxite sales - customers 994 13,775 493,888 418,274 Deductions Taxes on revenues (57,373) (45,798) Net operating revenues 436,515 372,476 17. Related parties Transactions with shareholders and their affiliates are summarized as follows:

a) Bauxite sales

12/31/11 12/31/10 Alcan Alumina Ltda. 18,239 17,955 Rio Tinto Alcan Inc. 96,677 95,743 Alcoa Alumínio S.A. 25,315 23,021 Alcoa World Alumina Ltda. 2,800 2,990 Alcoa World Alumina LLC - A.W.A. 41,472 11,984 Alunorte - Alumina do Norte do Brasil S.A. 168,442 154,906 BHP Billiton Metais S.A. 84,278 59,870 Vale International 5,763 22,549 BHP BMAG 3,592 15,481 Hydro Aluminum 46,316 - Total transactions with shareholders (Note 15) 492,894 404,499 Local sales 299,074 258,742 Foreign sales 193,820 145,757

b) Trade accounts receivable

12/31/11 12/31/10 Alcan Alumina Ltda. 1,206 4,666 Rio Tinto Alcan Inc. 6,501 7,333 Alcoa Alumínio S.A. 2,812 4,559 Alcoa World Alumina LLC - A.W.A. 2,944 608 Alcoa World Alumina Brasil Participações Ltda. 1,548 - Alunorte - Alumina do Norte do Brasil S.A. 18,084 20,329 BHP Billiton Metais S.A. 6,603 11,387 Hydro Aluminum 4,910 - Vale International - 3,305 BHP BMAG - 3,657 Total from related parties 44,608 55,844 Local accounts receivable 30,253 14,903 Foreign accounts receivable 14,355 40,941

The above balances arising from the normal course of business are usually paid on the due date, plus translation adjustments.

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c) Management fees

Management fees basically correspond to the compensation of executive officers and related social charges and are recorded in “General and administrative expenses”. Such executive officers do not have a variable income, did not obtain loans from, or grant loans to, the Company and do not have any significant fringe benefits.

During the year, the Company incurred management fees in the total amount of US$ 1,201 (US$ 970 in 2010).

d) Cash and cash equivalents

These values correspond basically to financial apllications settlement of less than 90 days, and pay the taxes market values, with the Bank Votorantim, related part of group “CBA” Brasilian Aluminum Company.

Modality Remuneration Maturity 12/31/11 12/31/10 Application debentures 100 a 102% do CDI 03/23/12 1,112 1,407 Application debentures 100 a 102% do CDI 01/27/12 3,841 3,003 Total 5,953 4,410

18. General and administrative expenses 12/31/11 12/31/10 Administrative expenses (10,457) (10,954) Depreciation (316) (389) Other (780) (244) Total (11,553) (11,587)

19. Other operating costs and expenses 12/31/11 12/31/10 Provision reversals - 23,381 Tax expenses (1,190) (1,506) Other (2,045) (3,855) Total (3,235) 18,020

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20. Financial income/ (expenses)

12/31/11 12/31/10 Financial income Income from marketable securities 1,244 312 Income from escrow deposits 17,368 16,726 Other 743 573 Total 19,355 17,611 Financial expenses Financing expenses for short and long-term debt (16,061) (16,040) Interest for reforestation and mine closure (3,383) (2,158) Other (1,527) (3,098) Total (20,971) (21,296) Tax litigation - interest and inflation adjustments - Law No.11.941/09

Interest for capital reduction proceedings (12,832) (43,564) Total (12,832) (43,564) Foreign exchange rate Translation adjustment gains 2,212 (785) Translation adjustment losses (17,337) 6,504 Total (15,125) 5,719

21. Financial instruments The Company considers that the book value of its financial instruments are almost the same as the fair value due to the short-term maturity or frequent revaluation of such instruments.

The company entered into a swap transactions in October 2008 to hedge its cash flow referring to 50% of its prepayment contracts in the amount of US$ 50 million, with a balance of US$ 16,666 as of December 31, 2011 (US$ 30,000 in 2010). The objective of that hedge was to exchange its post-fixed interest rate (LIBOR + 0.65%) for a prefixed rate of 3.98%.

During 2011, the Company recorded payments of US$ 769 (US$ 1,242 in 2010) with its interest rate hedge. The loss, which is included in “Financial expenses”, refers to part of the changes in the fair value of the derivative financial instruments excluded from the assessment of the effectiveness of the coverage. The effect of the fair value of that transaction in the amount of US$ 377, was recorded in shareholders’ equity in “Equity accounting adjustments”, generating a balance of US$ 197 (net of taxes at 34%) as of December 31, 2011 (US$ 574 in 2010).

A summary of the transaction is presented below:

Reference value Fair value Loss noncash Description 2011 2010 2011 2010 2011 2010 Company’s position - floating rate (LIBOR + 0.65%) 26,651 30,022 15,989 29,489 - - Bank’s position - fixed rate of 3.98% 26,651 30,103 16,287 30,440 - - Net position - (81) (298) (951) (298) (870)

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22. Risk management a) Financial risk management

Financial risk factors The activities of the Company expose it to various financial risks: market risk (including currency and interest rate risks), credit risk and liquidity risk. The Company’s risk management focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on financial performance by utilizing, if necessary, derivative financial instrument to protect itself from certain risk exposures.

The Company’s risk management is performed by the treasury department and the policies are compulsorily approved by the Board of Directors. Treasury identifies, assesses and enters into financial instruments with the purpose of protecting the Company against possible financial risks, mainly arising from interest rates and foreign exchange rates.

a.1) Market risk

The Company is exposed to market risks arising from its business activities. Such market risks primarily involve the possibility of fluctuations in interest rates and foreign exchange rates:

i) Foreign exchange risk Due to the fact that the Company has accounts receivable and has assumed financial obligations of various natures in foreign currency, a Foreign Exchange policy is conducted, which establishes the exposure levels linked to such risk. Amounts in foreign currency of the amounts receivable and payable of commitments already assumed and recorded in the financial statements arising from the Company’s operations, as well as future cash flows, are considered.

ii) Interest rate risk The Company’s interest rate risk arises from financial investments and short and long-term loans and financing. The company’s Management adopts the policy of keeping the ratios of its exposures to interest rate income and expense liked to post-fixed rates. Financial investments and loans and financing are adjusted according to the changes in the post-fixed CDI rate, in compliance with the agreements entered into with financial institutions.

a.2) Credit risk

The Company is subject to credit risks in connection with financial instruments entered into while managing its business. The risk of non-settlement of the transactions held with the financial institutions with which the Company operates, which are considered by the market as top-tier financial institutions, is considered as low risk.

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a.3) Liquidity risk

A prudent management of the liquidity risk implies in keeping cash, sufficient securities, cash captured through committed credit lines, and the ability to settle market positions. By virtue of the dynamic nature of the Company’s businesses, Management maintains flexibility in the capture by maintaining committed credit lines.

b) Capital management

The Company’s objectives in managing its capital are to safeguard its going concern in order to offer returns to shareholders and benefits to other interested parties, in addition to maintaining an ideal capital structure to reduce that cost.

The net financial position corresponds to the total cash, cash equivalents and financial investments, minus the amount of short and long-term loans and financing.

The following table demonstrates the net financial position as of December 31, 2011:

US$ Financial assets 43,318 (-) Financial losses (247,389) (=) Net financial position (204,071)

The Company holds control on the indebtedness level and its position as of December 31, 2011 is within the maximum levels permitted by the Company.

c) Foreign exchange exposure

The following is the foreign exchange exposures as of December 31, 2011.

US$ Assets exposed to foreign exchange rate fluctuations 44,608 (-) Liabilities exposed to foreign exchange rate fluctuations (172,248) (=) Net foreign exchange exposure (127,640)

Foreign exchange translation adjustments derives from the fluctuations in the foreign exchange rates with respect to the balances of loans and financing and trade accounts receivable linked to foreign currency.

The exposed liabilities derive from loans and have long-term amortization, and their payment is guaranteed by the Company’s generation of cash in the next few years.

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d) Market values

As of December 31, 2011 and 2010, the market values of the financial investments are almost the same as those recorded in the financial statements due to the fact that they are linked to the changes in the CDI rate. Loans and financing are kept monetarily updated on the basis of the interest rates entered into at arm’s length; therefore, the amounts payable on the balance sheet dates are substantially similar to their market values, even those classified as “noncurrent”.

Because of the short term of the transactions performed the balances of trade accounts receivable and of accounts payable to suppliers, recorded at book value, have been estimated as being almost the same as their fair market value.

23. Insurance coverage The table below lists the assets covered by insurance policy the Company had as of December 31, 2011:

Details Due date Coverage Nominated risks:

Operating risks (materials damages and production loss) 10/31/2012 VR1: 1,518,005 LMI2: 185,521

Overall civil responsibility (moral and professional failures) 10/31/2012 10,662 National transportation (losses and damages) 08/01/2012 2,666 International transportation (losses and damages) 08/01/2012 5,000 Group life insurance (death by accidents - 48 x salary) 07/31/2012 Up to 1.029 Group life insurance (natural cause death - 24 x salary) 07/31/2012 Up to 448 Civil Responsibility: directors and managers - D&O 06/20/2012 10,445 Items sea (float) 05/07/2012 240 Airport Operations 12/09/2012 49,995 Engineering risk 12/31/2014 VR: 146,357 LIM: 63,973 Fleet of light vehicles 05/09/2012 4,572

24. Pension plan The pension plan of MRN, named MRN Previ, comprises the following funds:

• Benefits Generator Fund - BGF, that reaches those employees participants of the FGB-PAS, that became a migration alternative for their fund reserves;

• All MRN’s employees are eligible and have access to the Free Benefits’ Generating Plan - FBGP, and all participants of the former FGB-PAS may alternatively have their funds migrated to the new plan;

• Life Free Benefits’ Generator - LFBG, is available to all employees who may wish to constitute a plan under this scheme.

1 Amount of the risk. 2 Maximum indemnification limit.

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This program was developed following a defined contribution scheme, therefore, there is no actuarial risks and/or additional commitments that may be assigned to the sponsor.

The program was established in the form of defined contribution therefore, there are no actuarial risks and/or commitments that may be assigned to the sponsor.

During 2011, the Company booked as expense contributions the amount of US$ 1,673 (US$ 1,641 in 2010).

25. Subsequent events From the amount recorded in the judicial deposits line in current assets totalling US$ 4,064, the Company received on January 25, 2012 the amount of US$ 3,973referring to the payment of the undisputed portion of the Capital Reduction lawsuit.

26. Approval of financial statements The financial statements were approved and authorized by the Board of Directors on February 2, 2012.

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Board of Directors

Ricardo Rodrigues de Carvalho - Chairman

Ronaldo Del Buono Ramos - Advisor

Flávio de Medeiros Bocayuva Bulcão - Advisor

Ricardo Franzon Campana - Advisor

Aquilino Paolucci Neto - Advisor

José Carlos Danza Errico - Advisor

Fernando Simões Rodrigues - Advisor

Executive Officers

Júlio Cesar Ribeiro Sanna - CEO

José Adécio Marinho - CFO

Almerindo Moreira Barroso Accountant CRC-PA 011036/O -0 CPF3 437.366.962-72

3 Individual Taxpayer’s Register at the Ministry of Finance.

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